Europe’s operators invest through the pain barrier

They may rail against an unfriendly investment environment, but Europe’s network operators keep digging deeper to pay for the likes of 4G and superfast broadband. A recent report from the European Commission said EU telecoms revenue declined in 2013 yet investment grew.

Even arch-critics of Europe’s regulators – Cesar Alierta and Vittorio Colao, the respective chief executives of Telefonica and Vodafone Group – have sanctioned enormous increases in network spending.

Telefonica’s capex increased 27 per cent, to €3.7 billion, during the first six months of 2014. Rolling out fibre and 4G, both in Europe and Latin America, needs deep pockets. The operator expects full-year capex levels to reach 15.5-16 per cent of sales.

Flushed with proceeds from the sale of its Verizon Wireless stake, Vodafone topped up its capital spending budget to the tune of £7 billion over the next two years. A large slice of ‘Project Spring’ money is going on 3G and 4G expansion in Europe. Vodafone’s total spending for the next two years is pegged at £19 billion.

It’s not only large operators, supported by strong cash flows, that are splashing out. Bouygues Telecom, struggling in France’s hyper-competitive mobile market – and failing to find any respite through consolidation – announced a transformation plan in June. Yes, there would be job redundancies, but the operator maintained it would continue to invest in 4G and be “very aggressively-priced” on fixed broadband.

Although operators grumble about margin-squeezing competition and what they see as attacks on revenue from Brussels and national regulators – such as cuts to mobile termination rates and roaming tariffs – the need to ‘stay in the game’, either through network differentiation or developing new digital services to offset core revenue declines, is clearly a strong investment driver.

In a recent interview with Mobile World Live, Ulf Ewaldsson, Ericsson CTO, said many operators in Europe were “gearing up investment”.

But how sustainable is that investment if done through gritted teeth and backs against the wall? Ewaldsson pointed out in his interview that the main reason why Europe has experienced slow 4G rollout, at least compared with the US, Japan and South Korea, is because of regulatory obstacles and lack of market-driven consolidation.

A mobile operator CFO, wanting more consolidation in Europe – and without onerous conditions wiping out the market benefits of having fewer network players – recently told me there was a real danger, if regulators went too far, of reaching a tipping point. “Investors have options,” he said, “and they can invest in other places.”

Operators nearly always complain about regulators, of course, and will lobby for more favourable treatment. If investment demonstrably slows, however, or if some smaller players fall by the wayside, then the region’s regulators would surely need to think again.

A takeover of a major Europe-based player, perhaps by an Asian or US firm, would give more pause for thought.